US PPG expects to recover more margins as costs relent

HOUSTON (ICIS)–PPG is seeing signs that its costs are coming under control, which will allow the company to continue to recover margins, even though several trends could limit sales volumes, the US-based paints and coatings producer said on Friday.

“We’re on a margin recovery journey,” PPG CEO Tim Knavish said during an earnings conference call. “We absolutely expect to see continued margin growth.”

Margins had started to improve in the fourth quarter, and they grew again in the first quarter, which helped PPG beat its Q1 guidance for adjusted earnings per share (EPS).

PPG expects to increase margins again for the second quarter.

PPG is having an easier time procuring raw materials and logistics are improving, the company said in prepared remarks.

Costs for some raw materials, such as pigments, extenders, additives and inorganics continue to increase year on year. But overall, PPG’s realised cost of raw materials was flat year on year in the first quarter, and they should fall by a low single-digit percent range in the second quarter year on year.

Over the past several quarters, PPG has managed to raise prices to offset all of the cumulative cost inflation from the first quarter of 2021 to the first quarter of 2023, covering raw materials, energy, logistics and wages.

PPG expects to continue to raise prices by smaller amounts for the rest of the year.

The recovery in margins should continue, even though PPG expects sales volumes to be flat in the second quarter. Volumes could be more challenging in the second half.

Some end markets remain weak, such as US housing and construction. Others are showing strength, such as aerospace and infrastructure.

RECOVERY IN AEROSPACE, AUTO REFINISH
PPG expects to continue benefiting from the recovery in demand from the aerospace industry, which still has backlogs from original equipment manufacturers (OEMs) and aftermarkets. The military segment remains strong.

As those customers increase their ability to work down backlogs, PPG can increase its capacity to meet that demand.

“In many parts of our aerospace business, we can sell anything we produce,” Knavish said.

Outside of coatings, PPG produces transparencies for aircraft and it expects demand for those products will remain strong.

For automotive refinish coatings, collision repair shops have backlogs because of shortages in labour and replacement parts for automobiles. As these shops work down their backlogs, PPG’s auto-refinish business should benefit.

For automobile OEMs, PPG expects growth in the low single digits. PPG could exceed that forecast if growth in China exceeds expectations and if consumers have an easier time affording new vehicles.

In the US, government infrastructure programmes should increase demand for industrial coatings, protective coatings and highway coatings, which PPG sells in its traffic solutions business.

In Europe, demand has stabilised at lower levels. If it recovers, PPG stands to benefit. The company has a strong position among European automotive OEMs.

PPG expects growth in Mexico should benefit its Comex business.

In China, PPG expects a moderate and elongated recovery, but the company warned that the pace remains unclear.

WARNING ON US CONSTRUCTION
PPG said architectural coatings for the US will be challenging because of the slowdown in the housing market and because many consumers completed do-it-yourself (DIY) projects during the pandemic.

Paint demand takes place at the last part of the house-construction cycle and it is unclear if the market has bottomed out, said Vince Morales, PPG CFO.

Multifamily construction is still performing well, and those projects should be completed in early 2024, Morales said. After that, PPG expects fewer projects because of tighter credit.

PPG is still wary about the speed of China’s recovery and the strength of its manufacturing sector following the end of the country’s COVID restrictions. The company also raised concerns about global industrial demand.

All of these factors could limit sales volumes.

Paints and coatings are made with titanium dioxide (TiO2) and several solvents such as glycol ethers, butyl acetate (butac), methyl ethyl ketone (MEK) and isopropanol (IPA).

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